Advantages of Offshoring

Companies obtain many offshoring benefits when they relocate their business operations to overseas
locations. The following are the major advantages:

 Lower labor costs – It is more affordable for companies in the United States to pay foreign
employees who have lower salaries compared to employees within the country. Offshoring will
make a good business practice for business owners if offshore workers can do the same type of
work as their American counterparts for much lower labor costs. This is especially important
for labor-intensive businesses such as manufacturing and service jobs where reducing labor
expenses can help in reducing costs of operations, increasing revenues, and maximizing income.

 Cost savings – Aside from salaries, other types of compensation and benefits are much lower in
offshore countries compared to the United States. Employers can save from lower costs in
Medicare taxes, Social Security benefits, health insurance, workers compensation, and
other costs associated with employees based in the U.S. Costs of utilities, infrastructure and
materials are also lower in developing countries like the Philippines, India, and other countries
that are cost-effective for labor-intensive industries such as manufacturing and call centers.

 Tax benefits and financial incentives – Many offshoring destinations such as the Philippines offer
tax holidays, financial incentives and fewer business regulations to attract foreign direct
investments and stimulate growth in industries such as offshoring and business process
outsourcing. Those tax holidays and financial incentives make it more affordable for companies
to relocate to offshoring destinations.

 Returning earnings back to the U.S. – A company earning more revenues from tax benefits,
financial incentives, and other costs savings from offshoring will be able to achieve its goal of
more income and maximum profits. It can return those revenues to its U.S. operations by
making additional wages and benefits for local employees, investing in research and
development, returning the profits for investors and shareholders, and paying state and federal
taxes.

 24/7 operations – Companies can cover time zones not handled by their operations through
offshore subsidiaries or by hiring offshore service providers that offer 24/7 operations. For
business process offshoring, the local team in the U.S. can turnover unfinished tasks to the
offshore team so there is continuous work on a project until it is finished.

 Availability of skilled labor – Offshoring locations such as the Philippines and India have a vast
pool of skilled labor from which U.S. companies can recruit employees for their offshoring
operations. These countries have a rich pool of talent in terms of English language proficiency,
college degree earners, and the skills of their workforce.

Disadvantages of Offshoring

As much as companies obtain many benefits when they offshore their business processes to other
countries, there are also some disadvantages of offshoring for them. Below are some of these
disadvantages:
 Language and communication barriers – Many offshoring countries use English as an official
language in business and government transactions. But there are different degrees in the depth
and understanding of knowledge of English between the workers of the offshore country and
their foreign counterparts. The accent can also be a challenge when offshore employees come
from a region with a strong local accent and they have to talk to foreigners with distinguished
accents.

 Cultural and social issues – Offshore countries have cultural and social customs that are very
different from the countries of the originating companies. For example, an American executive
may talk in a candid, outspoken manner while his Filipino employees are more reserved and not
used to the frank approach of communicating. Both parties may miscommunicate what they
intend to say to each other and this could lead to misunderstanding.

 Quality control problems – For manufacturing offshoring, ensuring that a product is strictly
built according to the parent company’s standards may be a challenge under the offshore
location’s manufacturing set-up. Even if the parent company provides quality guidelines, the
differences in working culture, language, logistics and supply chains of the country where the
factory is located may affect the quality of the finished product.

 Effect on jobs in the home country – The parent company may have to terminate the
employment of its local workers if it offshores their jobs to overseas subsidiaries or hire the
services of offshore services providers. This can contribute to a high unemployment rate in the
local community where the workers were laid off and affect its economy. Another issue is the
impact on the remaining jobs in the factories or offices where the company laid off many
workers. Stagnation of wages, uncertainty about job security, and low morale could affect the
output of employees. This could eventually lead to low productivity and affect business
operations. The company’s public image may also be damaged if there is a lot of negative
publicity generated in the media about the local economy losing jobs to other countries.

 Time zone adjustments – The time zone differences between the home country and offshore
country can be a problem for both manufacturing and services offshoring. It can be challenging
for the management in both countries to organize shift patterns that are not disruptive for both
sides. This can be an issue when both sides have to find an appropriate time to talk to each
other. The gaps in communication times could also affect the decision-making process. For
example, the offshore country needs to make an important decision about a project, but it
cannot move forward without consulting with the home country. The time it takes to wait and
get a decision could affect urgent tasks that are time-sensitive and deadline driven.